Dick Smith shares flat after debut

Fourteen months ago,
Nick Abboud
was an up-and-coming executive at
Myer
, earning just over $600,000 a year as national stores director and dreaming of the day when he would become chief executive.

When the sharemarket closed on Wednesday, 43-year-old Mr Abboud, who left Myer in September last year to join
Dick Smith
as chief executive, was worth more than $33 million – on paper at least – as shares in the consumer electronics retailer closed on par with their $2.20 issue price after a $344 million initial public offer.

Mr Abboud has also banked $6 million in cash, after forfeiting his right to sell some of his shares into the IPO. Mr Abboud owns 6.5 per cent of Dick Smith and will be entitled to sell about 64 per cent of his equity after the retailer reports its 2014 results next August.

But Mr Abboud’s new-found status as multimillionaire and BRW Rich List candidate is overshadowed by the four-fold return enjoyed by his partners at Anchorage Capital Partners.

The private equity firm headed by Phil Cave received $358 million, including a $15 million dividend, from the IPO, making a $264 million profit on the $94 million it paid Woolworths last year. Its remaining 20 per cent stake is worth another $104 million, but is escrowed until 2014.

At Wednesday’s close, Dick Smith had a market value of $520 million and an enterprise value, including debt, of $533 million.

Anchorage’s windfall gains and the strong institutional interest in the IPO have highlighted the shareholder value forfeited by Woolworths in selling the chain at a bargain basement price.

Woolworths booked $420 million in restructuring costs and goodwill impairments, writing down the business to zero, before selling Dick Smith to Anchorage for $20 million.

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In June this year Woolworths received an extra $74 million ($24 million of which was deferred) after agreeing to forfeit its right to 25 per cent of future profits when Dick Smith was on-sold. If Woolworths had not given up that right it may have been entitled to an extra $100 million.

Australia’s largest retailer has defended the sale, saying Dick Smith was non-core and better off in new hands. But chairman Ralph Waters admitted at last month’s annual meeting that Woolworths might have paused if it knew Dick Smith would be “a bit more profitable" in a year or two.

“If you really like it enough, you can still buy it," Mr Waters said.

Dick Smith’s profits have risen three-fold under the new management team. The retailer expects earnings before interest, tax, depreciation and amortisation to reach $71.8 million in 2014 on sales of $1.22 billion, compared with $23.4 million EBITDA in 2013 and $32.6 million in 2012, the last full year under Woolworths’ ownership.

In the space of 12 months, Mr Abboud and his team have turned the business around by renegotiating terms with suppliers, selling off excess inventory, slashing labour costs, overhauling supply chain systems and changing the culture of the chain.

Doubts remain over the sustainability of the turnaround, especially given the fact that generous incentives for the executive team are weighted to the short term.

However, Mr Abboud has promised that 2015 will be a “more exciting" year than 2014 as the retailer opens new stores, cuts distribution costs and seeks better trading terms from suppliers.

If Mr Abboud was disappointed with the retailer’s sharemarket debut he was not letting it show, looking delighted as the first shares changed hands.

“It was an honour to take Dick Smith on to the public boards today and to welcome thousands of new shareholders to our company. We remain focused on delivering for our shareholders and customers," Mr Abboud said.

“We have a clear roadmap and strategy for Dick Smith today and into the future and our focus remains on this."

Dick Smith shares opened at $2.28 and traded between $2.16 and $2.32 before closing on par with their $2.20 issue price. About 64.1 million shares, representing 40.9 per cent of the shares issued, changed hands.

“Investors will need to see evidence of the company meeting [or beating] pro-forma numbers for the share-price to improve from here," CIMB analyst Daniel Broeren said.

Joint lead manager Macquarie Equities dominated trading, accounting for about 45 per cent. The buyers were mainly small-cap funds scaled back when the institutional offer was oversubscribed.

Fund managers said a 12 per cent fall in the price of
JB Hi-Fi
in the past month had reduced the opportunity for stag profits. JB Hi-Fi’s price/earnings multiple has fallen from 17 to 16 as investors sold stock to buy into Dick Smith, which is being valued at a 3-point discount to JB, at 13 times earnings per share.